Fabrinet (FN) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fabrinet's financial results conference call for the first-quarter FY17.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the call over to your host, Garo Toomajanian, Investor Relations.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the first-quarter FY17 ended September 30, 2016. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Fabrinet, and TS Ng, Fabrinet's Chief Financial Officer. This call is being webcast, and a replay will be available on the Investor section of our website located at investor.Fabrinet.com. Please refer to our website for important information, including our earnings press release including our GAAP to non-GAAP reconciliation.

I would like to remind you that today's discussions will contain forward-looking statements about the future financial performance of the Company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as the date of this presentation. And we undertake no obligation to revise them in light of new information or future events, except as required by law.

For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular the section captioned Risk Factors in our Form 10-K filed on August 17, 2016. We will begin the call with remarks from Tom and TS, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO and Chairman, Tom Mitchell. Tom?

Hey Garo, and good afternoon everyone. FY17 is off to a strong start with first-quarter revenue up more than 50% from a year ago. We are benefiting from positive industry trends and growing demand for our manufacturing capabilities and expertise.

In the first quarter both new and existing customers ramped programs oriented toward newer technology. We believe the current growth cycle in the optical market will continue to gain traction in FY17, driving further demand. As a result of this anticipated growth, we're excited to have opened our new manufacturing campus in Thailand, significantly adding to our capacity and supporting our future growth. We're currently in the process of installing manufacturing lines that we expect to be operational in the March quarter. I will now turn the call over to TS for more details on the quarter and our outlook.

Thank you Tom, and good afternoon everyone. I would like to provide you with more details on our performance by end-market and our financial results. Total revenue in the first quarter was $332 million, an increase of 53% from a year ago and above the high end of our guidance range. Non-GAAP earning were $0.80 per share and were also above the high end of guidance, due primarily to our revenue [upside].

As I review our results for the first quarter, keep in mind that in addition to strong market dynamics we also benefited from an extra week in the first quarter of FY17, as compared to a 13-week quarter in the first quarters of FY16. Adjusting for the impacts of the additional week, revenue would have been approximately $308 million, an increase of 42% from a year ago. Also we completed our acquisitions of Exception EMS with two weeks remaining in the quarter, and our results include a less-than-$1-million contribution from Exception to non-optical revenue. Exception did not materially impact non-GAAP earnings per share.

In the first quarter the optical market again led our growth, as we saw growing demands especially for advanced technologies. Revenue from new business or new programs that we started tracking in quarter one of FY14 represent 30% of revenue in the first quarter compared to 23% a year ago. Within revenue, optical communication represented 77% of our total revenue during the first quarter, consistent with the prior quarter, as optical revenues of $256.8 million increased 66% from a year ago.

Non-optical revenue's of $75.2 million also saw increasing growth compared to recent quarter at 23% year on year. As I mentioned non-optical revenue includes less than $1 million in revenue from Exception EMS with organic growth that was above 30%, even without the contribution from Exception.

Within optical, the revenue split was 65% from telecom applications and 35% from Datacom applications. Both telecom and Datacom growth were exceptionally strong, with telecom growth of 85% and Datacom growth of 40%. Note that we have recently shifted the allocations of certain customer revenue from Datacom to telecom to better represent how we believe our customer products are being deployed in the field.

We have posted a supplement with the revised telecom/Datacom mix for FY16 on our investor relations website. Note that we may make future revisions in how we categorize certain revenue in the future to better reflect changes in end-customer applications.

By technologies, 100-gig solutions continue to see very rapid adoption with revenue from 100-gig component and module increasing 130% from a year ago to approximately $133 million, or 52% of optical revenue. Revenue from 10-gig solutions remains stable, with recent quarter and represented 10% optical revenue, while 40-gig solution not unexpectedly continue a trends of declining revenue.

Within advanced technologies, silicon photonic modules continue to see a very strong growth with revenue that grew 159% from a year ago to over $67 million, or 36% of optical revenue. We also started to ramp [QSRT] 28 module for a handful of customers, and expect the volume will continue to grow in FY17.

Turning to our non-optical communication business. Revenues of $75.2 million for lasers, sensors and other market represented 23% of total revenue in the quarter. We were pleased to see laser revenue reached a quarterly record of $38 million, comprising 51% of non-optical revenue in the quarter. Automotive product grew 11% from a year ago, and represented 28% of non-optical revenue.

Fabrinet West, our new product introduction facility in Santa Clara, continues to ramp. With three manufacturing lines now up and running, we are well on our way to reaching our targets of revenue that approaches $10 million in the December quarter.

Our acquisition of Exception EMS diversifies our new product introduction business, and will continue to non-optical revenue as we look ahead. Our strategy at Exception will be to duplicate the success we have seen in our Fabrinet West MPS facility while diversifying our target market to address new opportunity.

Additionally we have completed construction of the first building at our new campus in Chonburi Province, Thailand. This 500,000 square foot facility increases our total manufacturing footprint by nearly 50% which will enable us to continue our trajectory of growth for a number of years. We continue to expect a small amount of revenue from Chonburi in the March quarter, with revenue increasing the quarters that follow.

Now turning to the details of our P&L. A reconciliation of GAAP to non-GAAP measures is included in our press release. Non-GAAP gross margin in the first quarter was 12.2%, consistent with the first quarter of FY16. As anticipated, gross margin declined from the fourth quarter of 2016 due to annual [merit] increment and the inclusion of manufacturing costs. Also saw that with Fabrinet West, we have now fully represented in cost of revenue rather than in operating expenses. And has been the case in FY16.

These type of costs in cost of revenue resulted in a small drag on gross margins in the first quarter. And we expect that the headwind to become a tailwind as Fabrinet West becomes profitable in the coming quarters. For the second quarter we expect non-GAAP gross margin to increase slightly over the first quarter as we benefit from increased scale.

Non-GAAP operating income in the first quarter was $31.4 million resulting in an operating margin of 9.4%, the highest level we're seeing in over five years. Non-GAAP operating income exclude share-based compensation expenses of $5.6 million, non-GAAP operating margin improved 160 basis points from a year ago primarily due to higher margins and leverage to operating expenses with growing revenue. Non-GAAP first-quarter results exclude the impact of $1.7 million realized foreign exchange gain due to continuing strengthening of the Thai baht during the first quarter.

While the Thai baht weakened earlier in the quarter, it has since stabilized to a level in line with the first quarter. Taxes in the quarter were a net expense of $1.9 million. And our normalized effective tax rate was 6.6%, which was within our expected range of 6% to 7%. Non-GAAP net income was $29.7 million in the first quarter, or $0.80 per diluted share, compared to $16.2 million, or $0.45 per diluted share in Q1 of FY16. On a GAAP basis which includes share-based compensation expenses and amortization of debt, insurance costs net income for the first quarter was $22.8 million, or $0.61 per diluted share, compared to $1.6 million, or $0.04 per diluted share in the first quarter of FY16.

Moving on to the balance sheet and cash flow statement. We ended the first quarter with a cash and investment balance of approximately $256.9 million compared to $284.5 at the end of fourth quarter of FY16. Cash balances included the impacts of $13.5 million in cash consideration for the acquisition of Exception EMS, $14 million in CapEx for machine and equipment and $4.9 million for long-term loan repayment.

Additionally, $13.5 million in proceeds from loan drawdown was to support Chonburi construction payment. For FY17 we continue to expect CapEx to be in the range of $60 million to $70 million with approximately $30 million to $40 million of that in maintenance CapEx and the remainder going toward the final construction and equipment for our new manufacturing facility in Chonburi, Thailand.

I would now like to discuss guidance for the second quarter during which we expect to see our momentum continue. We anticipate revenue in the second quarter to be between $332 million and $336 million, representing growth of 42% to 44%. This guidance includes an anticipated revenue contribution from Exception EMS of approximately $5 million which will be reported as non-optical revenue.

While on an organic basis this will represent a small sequential revenue increase from the first quarter, if you adjust for the additional week in Q1 our guidance represents a sequential increase of $20 million to $24 million, excluding the contributions for Exception, and an increase of $24 million to $28 million including Exception revenue in both Q1 and Q2. We anticipate non-GAAP net income per share in the second quarter to be in the range of $0.78 to $0.80. And GAAP net income per share of $0.65 to $0.67 based on approximately 37.8 million fully diluted shares outstanding. The impact from Exception on both GAAP and non-GAAP earning per share is expected to be immaterial.

In summary, we're off to a good start in FY17 with another quarter of strong financial performance. We expect this momentum will continue in the second quarter. We also look forward to further securing our business in the second half of the year and beyond as our expanding capacity serves growing industrial demand.

Operator, we will now like to open the call for questions.

Thank you.

(Operator Instructions)

Troy Jensen, Piper Jaffray.

Hey, congrats on the really good quarter gentlemen.

Thank you.

Tom or TS, I got a question for you. I guess there's been a lot of chatter recently about 3-D sensing. And it looks like the [momentum in Q6] are viewed to be the leaders in that category, and there's a fair chance that we may get some 3-D sensing applications in some high-volume cell phones for next year.

Just be curious to know, given that light in Q6 seemed to be best position for 3-D sensing. Would that be something that you would manufacture for those two?

This is TS. If you look at -- my understanding of 3D sensing is pretty much you need to have the PCBA capability. You need to know how to handle optical components. You also know -- must have the capability of the stock control system, know how to handle stock control system.

All of this are within Fabrinet's core competencies. So obviously in the past we talk about the (inaudible) compute. We even helped the automotive guys to do (inaudible). If a customer come to us, fit into our margin profile, you will see this is something we are best at. So it will be an opportunity for us.

Perfect. TS, do have any sense on the amount of dollar content that you guys would touch in something like this? To my knowledge this is like a $2 to $3 part that would be going ito cell phones. And historically you do (inaudible), high-volume -- or excuse me, low volume, high specialty, right? This seems to be a high volume, low specialty. Maybe not low specialty, but thoughts on the opportunity here for you.

This is consumer electronic. They come and go. And like wind. By the time you know, they might be gone or they might ramp up suddenly. So honestly, is hard for me to say at this moment. Obviously, we have a sensor segment. We report that in our (inaudible). So that you continue to monitor that.

Okay, very fair. Last question for you, TS. I think you talked through kind of normalizing the numbers here to get to a sequential increase in revenues. And it looks like it's about 8%, roughly. Can you give a sense for whether or not you think both Datacom and telco grow roughly of that level, or is one stronger than the other in the December quarter?

I think all along we've been saying that in the last for four or five quarter now, Datacom is pretty strong, continuing to enjoy year-on-year nice growth. And we said telecom is accelerating. And right now we do see telecom as accelerating right now.

So the story is still intact. We see growth in both segments, but I think telecom will be growing faster from our vantage point. I don't know if Tom wants to add anything?

I agree with that. I think telecom, and we've seen in the past that aligns with that, too. I think telecom will continue to grow faster.

Okay. Keep up the good work.

Thank you.

(Operator Instructions)

Patrick Newton, Stifel Nicolaus.

Good afternoon Tom and TS. Thank you for taking my questions. Just a two-part question on your NPI facility. You talked about being on track to $10 million in revenue in the December quarter. Is that still the right level of breakeven? Then, on the gross margin profile of the new product innovation facility, given that it was a drag on this quarter, can you help us understand what point the NPI gross margin actually becomes accretive to your margin profile?

So Patrick, and our 10-K and Q we always say about Fabrinet, we put only one segment. So Tom just like to say that whether in the UK or whether it's the Santa Clara facility, is like [giving seven or giving eight] (inaudible) to our [Pine house] facility.

In the past [we always asked] about Fabrinet West, so we give some guidance and we're still approaching our guidance, $10 million by December quarter. At that level we try to break even at gross margin level. And then the quarter follow or so we try to break even [and have P&L].

So that's still the plan. We are marching toward the plan. Again, UK is the same thing. We're not going to break down UK. But you have [adjust] Fabrinet based on the total worldwide operation (inaudible) post a 12.2% growth margin, that includes everybody. So you haven't viewed that.

Again, a lot of product might transfer from Santa Clara or UK to Chonburi, our new facility. So that kind of make the individual (inaudible) P&L cloudy. Does that make sense?

Yes, that makes sense. I guess you're shifting to capacity in Chonburi. Could you talk about the number of days or square footage that you currently have commitments for? And then you talked about initial revenue in the March quarter, but given timing of Ranson qualification periods, when should we really start to see Chonburi kick in from a revenue tailwind perspective?

This is Tom. Last time when we talked, I think that we said that we were at for spoken-for capacity was about 10%. Is that right TS?

Yes.

That number's now gone up to 25%. It's a little bit better than 25%. And that -- so not being so specific with base and floors or what, but in total it's about 25% ar spoken for. Does that help you?

Yes. That's very helpful. I guess if we look at that incremental uptick, is that being driven more by your optical business or the non-optical business?

It's driven by the optical business and the non-optical business, in that we continue to grow in both areas. But the pace of the Company is growing about the same pace.

Okay. And then just last one is a clarification. TS, you talked about some product reclassification from Datacom to telecom and that we can get that information on the website. But can you help us understand what products were reclassified?

In the past we have the telecom networking. Those are customer assemble photonic integrated circuits. And we use certain ratio to split between telecom and Datacom.

And also we saw some of the customer change -- at same time transceivers can be either telecom or Datacom, depends on the application. So more information about what to add. And what we did is that we go back and reclassified the same transceivers shipped to the same customer in the same manner so we can compare.

But if you look at it at the 30,000 foot level, our story still hold. In other words, Datacom has been pretty strong in the last five, six quarters based on the year on year. And telecom is late into the party and they're accelerating. So those are the -- basically the bottom line message. And it is still intact.

I understand the messaging. But was there a certain product line, like CFP, CFP-24, something like that you rolled out of the Datacom and into telecom? Or anything that was more pervasive?

Not exactly. In the past some of the customer, we had to guess their application. So now, for example, one of the customers on the long haul, is actually telecom. But in the past we didn't know they all ship to long haul. So we [can't] put in Datacom. So we do that reclassification, obviously. And if we reclassify today, I had to go back to restate that [trend]. And that is what we're doing today.

Great. Thank you for taking my questions. Good luck.

Thank you, Patrick.

I'm showing no further questions at this time. I'd like to hand the call back over to Tom Mitchell for any closing remarks.

We want to thank you for joining our call. And we look forward to speaking to you again. Good night.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may disconnect. Everyone have a great day.